As tax law is very complicated, this article is intended only for educational or illustrative purposes and should not be construed to communicate legal or professional advise. You should contact us with any specific questions so we can properly interpret how the tax laws applies to your situation. Killingbeck Tax Preparation, Kokomo, Indiana. 765-452-8000.
How to Save with 28 Federal Tax Deductions!
We have put together for you the below listing of the basic rules for tax deductible savings from some 28 Federal Tax Deductions. (For additional tax savings laws, please see our listing of Federal Tax Credits and State Tax Deductions and Credits under our Tax Preparation listing.)
The tax deductible savings you receive by claiming a Federal Tax Deduction depends on your top tax bracket. For example if you are in the 15% bracket, when you add the state savings, you generally will save about 20% of your deduction. If you are in the 25% bracket, you will save around 30%. Now if your income is low and you are in the 0% tax bracket, unfortunately the way the system is designed you won't have any tax deductible savings. Let us know if you have questions. Killingbeck Insurance, Kokomo Indiana, 765-452-8000.
Educator Expense Tax Deduction
Teachers’ classroom expenses can be tax deductible without itemizing up to $250 for unreimbursed qualifying expenses. (Up to $500 if both spouses are teachers.)
- Eligible teachers include K-12, counselor, principal, or aid who worked at least 900 hours during the school year. Home schooling does not qualify.
- Eligible tax deductible expenses include books, supplies (other than non-athletic supplies for health or physical education),computer equipment, other equipment, and supplementary materials used in the classroom.
Reservists, Perfoming Artists, Fee Based Government Employees Tax Deduction
- Overnight Travel for Reserve & National Guard - Reservists & Guard who stay overnight more than 100 miles away from home get a tax deduction for unreimbursed travel expenses (transportation, 50% of meals, lodging). Must complete form 2106.Tax deductible is limited to regular per diem rate for lodging and food.
- Qualifying performing artists get a tax deduction on form 2106 expenses. A qualifying artist is a person who is an employee of 2 or more employers, earned at least $200 from such employment & AGI must be less than $16000 before expenses and business expense exceed 10% of business income. Must attach form 2106.
- State and local officials paid on a fee basis get a tax deduction for unreimbursed business expense. Use form 2106.
Health Saving Account Deduction (HSA) Income Tax Deduction
- Taxpayer must be covered at work by a qualified high deductible plan or has their own qualifying high deductible medical plan.
- There is no requirement to have earned income.
- 2015 Deductibles and Maximum Out of Pocket:
a. Individual $1300 ($1300 in 2016) with a maximum of $6450 ($6550 in 2016)
b. Family $2600 ($2600 in 2016) with a maximum of $12,900 ($13,100 in 2016)
- Must Not be covered by Medicare or other medical plan
(except a health plan for dental and/or vision)
- Taxpayer cannot be a dependent.
- Taxpayer & employer can contribute up a total of:
A. 2015 self only $3350 ($3350 in 2016), family $6750 ($6750 in 2016)
55 and older can contribution an extra $1000 per plan. (If spouse is covered by separate HSA plan, each can put extra $1000.
B. Do not have to prorate yearly amount for months in plan if in plan for another year.
C. Can make deduction till April 15th.
- An HSA can pay for all Schedule A medical costs.
- Can rollover 1 time money from IRA to HSA. Amount rolled over is limited to yearly contribution limits.
- Excess contributions subject to 6% penalty.
- S Corp over 2% shareholders employer contributions for insurance and HSA are treated as compensation and deducted on this line.
- Recapture: HSA contribution must be included in income (subject to 10% penalty) for months contributed but didn't qualify.
Moving Expense Tax Deduction
Easy to miss this tax deduction, watch W-2 addresses
- Moving Expense are expenses for starting a new job, even a first job, or a change of job location. Can claim even if delay in making final move. (up to 1 year, longer for family.)
- Employer paid moving expenses should not be included in the W-2 unless they are non-deductible expenses or excess reimbursements.
- a. Tax free Reimbursements are coded as code P.
- b. Only get a tax deduction for taxpayer paid expenses.
- Requirements to be tax deductible:
- A. Distance between new job location & former home must be at least 50 miles more than the distance between your old job and old home.
- If first time job or job after break in employment, must be over 50 miles from old home.
- The main job location is where you spend most of your work time or where work is centered.
- Exception: Armed forces don't have a distance rule but must be due to a change of station.
- B. Tax deductible expense must be within one year from the time they first reported to work at the new location unless you can show circumstances prevented.
- C. Time Requirement for tax deduction: One spouse must remain & work full time in the new area for at least 39 of 52 weeks. Self-employed is 78 weeks during 2 years.
- No time test requirement for armed forces, for loss of job due to disability-death-layoff (unless willful misconduct), transfer for employer’s benefit, or move to U.S. due to retirement or as a survivor.
- Temporary absence for illness, strikes, layoff, natural disaster & vacation are consider working.
- Seasonal Unemployment is considered working if less than 6 months & covered by a contract.
- If taxpayer plans to meet the time test, go ahead and claim a tax deduction for moving expenses.Amend if they leave early.
- Failure to meet test: If fails to stay required time(except for involuntary separation) must amend to delete deduction or add back as other income on next year's return.
- Tax Deductible Expenses of Moving Are:
- A. The costs of moving personal effects is fully tax deductible. Examples: Hauling, truck rental, packing, moving services, moving insurance,& in transit storage within 30 days of moving.
- B. Traveling costs of household members is a tax deduction.
- Don't have to travel together to deduct costs. But can deduct just one trip per person.
- Travel cost include: Lodging, airplane, bus, actual auto expenses for gas (or 23¢ per mile; 19 for 2016) plus parking fees-tolls.
Meals are not tax deductible.
- You can also take a tax deduction for expenses of the day you arrive & expenses in the area of your former home within a day after your furniture was moved.
- C. Employer reimbersements paid under an accountable plan aren't deductible as employee did not include as taxable wages.
- Should show on W-2 in box 12 as code P.
- ii. If deductible moving expenses greater than reimbursements, claim excess on 3903.
- iii. If reimbursement and not paid under an accountable plan (no code P) taxpayer can claim on form 3903.
Self-Employment Tax Deduction
You can claim a Tax Deduction for a portion of self employment tax paid on Schedule SE.
Paid is actually a 50% deduction for 2013 due to 2% reduction in Social Security Taxes withheld on Schedule SE. Our tax program automatically computes the proper tax deduction from Schedule SE.
Self-Employed SEP, Simple or Other Qualified Pension Plan Tax Deduction
SIMPLE Pensions are special type of IRA set up by your employer (or by taxpayer if self employed). Must set up plan and amounts of contribution November the year before. Maximum employee contribution and tax deductible amount for a Simple plan for 2015 is $12,500 or $15,000 age 50 or older. Employer matches the first 2% or 3% of employees contribution.
SEP's (Simplified Employer Pensions) can take a tax deduction up to 20% of self employment income up to a maximum of $53,000. | Uses 401K plan rules. Can determine % of contribution before 4/15 deadline. No employee contributions allowed in plan. Does not require recurring yearly contributions.
Keogh Plan for Self Employed: Must setup plan December the year before.
Qualified Retirement Plan. Many reporting requirements. (See us.) One person 401K. 50 and older can contribute up to $55,000.
Self-Employed Health Insurance Tax Deduction
- Self-employed & Sub S shareholders can take a tax deduction of 100% of the premiums paid for medical, dental & long term care insurance for themselves, their spouse, & dependents up to the amount of earnings.
- Requirements for a tax deduction:
- A. Self-employed individual can not be eligible to be covered under the employer’s (or the spouse’s) subsidized health insurance plan. If covered only part of a year, can take a tax deduction for other months.
- B. The tax deduction can’t exceed net profit from business less the self-employment deductions and retirement contributions.
- Can take a tax deductions for the cost of insurance you paid for child under 27 even if they are not a dependent.
- Self Employed taxpayers can also claim
- If 65 Medicare taxes paid Part B and Part D.
- Health, dental & vision premiums paid from retirement (Delphi, GM, Chrysler).
- Long term care expenses up to $700 age 41-50, $1400 age 51-60, $3720 age 61-70 or $4660 age 71 and older.
- Employees of Corp. or partnership can claim medical expenses in 4 above only if reimbursed by Corp. or Partnership.
Penalty for Early Withdrawal of Savings Tax Deduction
The 1099INT will show the interest penalty on early withdrawal from savings plans. You get to claim this as a tax deductible item.
Watch for these closely as they are easy to overlook.
Alimony Paid to Others as a Tax Deductioin
We see just a little alimony in Indiana (mostly child support). If you think it might be alimony, ask if divorce decree ties payments to child or event in child's life. If so, payments are child support and not alimony.
- Must include x-spouses name & SS # on front of return.
- Required Payments such as tuition, medical bills, mortgage, taxes or insurance on a jointly owned home could be alimony and be tax deductible if it meets all the below requirements..
- A. If nonresident spouse pays and they are a co-owner, only ½ may be alimony. (The other half they deduct as their own interest & taxes.)
- Requirements for alimony to be tax deductible:
- A. Payment must not be treated as child support & parties haven’t designated the payment isn't alimony (such as a property settlement).
- B. X/spouses are not living in the same household.
- C. There is no liability to make payment after spouse’s death.
- D. Payment must be made in cash or equivalent (no property transfers) each of 3 post separation years.
Must recapture tax deduction if payments are $15,000 less or more in 3rd year than years 1 and 2.
IRA Tax Deduction
Regular IRA Eligibility Requirements to make a tax deductible contribution to an IRA:
- Must have earned income. (exception below for a nonworking spouse)
- A. Unemployment is not earned income.
- B. For self-employed, net income is earned income. Losses aren't deducted from other wage income.
- C. Alimony received counts as earned income.
- D. Military individuals can consider nontaxable combat pay as compensation for IRA purposes.
- Must be under age 70 1/2 (at year end) to put money into an IRA. (exception below for the nonworking spouse)
- Contributions must be made during the year or up to April 15th of the next year to be tax deductible.
- Active participants in another pension plan may not be able to fully deduct contribution according to below rules.
Regular IRA Limitations to claiming a tax deduction
- IRA Contribution Limitations to being tax deductible.
- IRA Rollover Rules Rollovers are not tax deductible.
- A. Only allowed one rollover a year. This applies separately to each IRA they have. Starting 2015 all IRA's are aggregated & treated as one. A transfer of funds directly to the other bank is not restricted to once a year limit.
- B. Transfer must be done within 60 days or it is a taxable distribution.
- Can ask IRS for exception if beyond taxpayers control.
- C. Can rollover into IRA from employer plan, 401K, 403B, etc.
- D. Can rollover nondeductible part of IRA to Roth IRA.
- If Nondeductible contributions are made or were made in the past, must complete 8606 in the year you do it and keep track of it for the future. Also do 8606 in year money is taken out of IRA.
- Excess contributions are not tax deductible and are subject to a 6% penalty each year. If withdrawn before Oct 15th of following year, excess contributions are treated as not being made.
SEP's (Simplied Employer Pension) & SIMPLE Pensions Tax Deduction
are a special type of IRA set up by your employer (or by taxpayer if self employed): You are not allowed to take a tax deduction on your tax return as you receive the tax savings in your paycheck.
- A. Maximum contribution for Simple plan is for 2015 $12,500 or $15,000 age 50 or older. Employer matches first 2% or 3% of employee's contribution. Must setup plan & amounts of contribution November the year before.
- B. Maximum contribution for SEP is 20% of self-employed income up to $53,000. Uses 401K rules. Can set up before 4/15 filing deadline. No employee contributions are allowed in this plan. Does not require recurring yearly contributions. Compensation limit is $265,000 for 2015.
Roth IRA’s Rules Tax Deduction
- Roth Contributions are not tax deductible but you receive a tax benefit as qualified distributions from a Roth are not taxable.
- Roth includes Roth IRA, Roth 401K and Roth 403B.
- Contributions are limited to lesser of $5500* or earned income.
- *A. Taxpayers age 50 can contribute an extra $1000.
- B. Can contribute up to $5500 to non-working spouse’s IRA.
- C. The $5500 limit (or $6500) applies to total of all IRA’s.
- D. Roth 401K are subject to 401K limits (no income limits!)
- Does not matter if active participant in another pension plan.
- Allowable contribution phases out at AGI* (no limit or 401K):
$181,000 to $191,000 for joint filers & Qualified Widow.
$116,000 to $131,000 for Single filers & Head of Household.
$0 to $10,000 Married Filing Separately who lived with spouse during the year.
*Must add back student loan & tuition deduction for AGI.
- Can make contributions after 70½ if you have earned income.
- Taxpayer does not have to start withdrawing from Roth at age 70½.
Must begin at taxpayer’s death. Tax free to beneficiary.
- Can make contributions up till April 15th.
- The earnings portion a of Roth IRA is tax free if taken after a 5 year holding period and at age 59 ½. Holding period for all Roth IRAs a taxpayer has, starts on the Jan. 1st of the first year contributions were designated for any Roth IRA.
- Early withdrawals from Roths are taken first from contributions*, which is not subject to tax or penalty.
- A. Exception: Withdrawal on Roth 401K a portion of earning is taxable based on earnings allocated to the account. Can roll Roth 401K to Roth IRA to get around this.
- B. Withdrawal of earnings before 2 years is subject to tax and 25% penalty. 2 to 5 years has 10% penalty (exceptions to penalty are under income section in the pension listing.
- Can rollover regular IRA, 401K, 403, 457 to Roth IRA if pay tax on taxable part of Regular IRA & meet requirements.
- A. Rollover Requirements: (Use form 8606.)
- There is no longer a $100,000 AGI limit to rollovers.
- Can now be filing MFS.
- Can’t be from Simple plan during first 2 yrs.
- Not from a required distribution over age 70 ½
- Rollovers subject to new 5 year rule to avoid 10% penalty on both contributions and earnings.
- Recharacterization of converted IRA. Can go back to original IRA before Oct. 15 of following year. Must be a trustee to trustee conversion. Must attach a statement from broker showing the change.
- A loss on a Roth is only tax deductible when total amount is taken out of all accounts. A loss is deducted as a 2% itemized tax deduction.
Education ESA and 529 Education Plans Tax Deduction
- Both Coverdell Education ESA (use to be called Coverdell IRA) and 529 Plans are non tax deductible plans where interest earned on account is tax free when withdrawn to pay education expenses. Can rollover from one beneficiary to another. No tax consequences to changing beneficiary in same generation.
- Usually better to use a 529 plan than a Education ESA unless using for K-12 education expenses. With Education ESA when child turns 18, the money is the child’s to spend. With 529, parent keeps control. Plus with Indiana College Choice 529 you get a 20% credit up to $1000 on Indiana State Return. (Can also use Roth IRA as college saving method.)
- QUALIFYING EXPENSES for both plans include: tuition, fees, tutoring, special need services, books, supplies, equipment, room and board up to rate set by college, costs of computer equipment and internet access. Expenses must be fore at least a 1/2 time student.
- A. Both plans cover College and Trade school costs.
- B. Education ESA expenses in addition apply to public, private, and religious schools providing K-12 education.
- Limit to contribution.
- A. 529 no limit to contribution. Contribution is considered a gift to the child. (Only get deduction on $5000 on state return. If Indiana College Choice 529 you get a 20% credit up to $1000 on Indiana state return.)
- Must be deposited in 529 account before 12-31.
- Must leave in account for 12 months.
- No income limits on deduction.
- B. Education ESA can only contribute up to $2000.
- Deadline for contribution is April 15th.
- Any individual can contribute to this account for a child. (Maximum of $2000 per beneficiary)
- Must be made to a child’s account who is under age 18.
- The maximum that can be contributed is phased out if contributor’s AGI is:
- a. $190,000 to $220,000 for a joint return.
- b. $95,000 to $110,000 for single return, HOH, MFS, QW
- Distributions are tax free if used for education.
- A. The Earnings part of 529 Distributions not used for education purposes are taxed as other income to the child and penalized 10% (unless they qualify for exception).
- B. Education ESA distributions if taxable are reported on child’s return as other income.
- C. The balance of education IRA not used for education purposes by age 30 must be distributed within 30 days of reaching age 30.
- D. Losses on total distributions are deducted as 2% misc. Itemized Deduction.
401K & Plans with Employer Tax Deduction
- Individuals can make contributions into an employer provided 401K plan, 403B, 457 plan or Roth 401K or Roth 403B.
- These amounts are already deducted from wages on the W-2 where they receive the tax savings. Note the SS income is higher for these individuals.
- 401K and 403K contribution for 2015 is $18,000 or $24,000 age 50+.
- For 2016, 18,000 or $24,000 age 50+.
Student Loan Interest Tax Deduction
Requirements to be tax deductible:
- Must be from education expenses for
- a. A student who was enrolled at least ½ time
- b. And working on a degree.
- Loan does not qualify if part of loan used for other purposes.
- The taxpayer must have the primary obligation to repay the loan to take the tax deduction.
- a. Parent’s can’t deduct interest on dependent’s loan!
- b. Loan must be in parent's name for parents to claim!
- The loan must be for the benefit of
- a. taxpayer or taxpayer’s spouse or
- b. for a dependent (or who was a dependent at the time the loan was taken out)
- c. any person you could have claimed as a dependent for the year the loan was taken out except that person filed a joint return, their gross income was over $4000 or you could be claimed as a dependent.
- A dependent can not claim the tax deduction (except for situations listed above). If loan is in dependent’s name, no one can claim.
- The maximum tax deductible amount is $2500.
- Deduction phases out at income levels of
- $65,000 to $80,000 single,
- $130,000 to $160,000 joint.
- Can’t claim if married filing separately.
- Can be any type of loan (except from a relative).
- a. If a credit card or home equity loan was used, must be able to separate the interest from the other loans.
- b. It includes loans that cover room and board.
- Loan institutions only required to send statement if over $600.
Tuition and Fees Tax Deduction
Often it is better to claim an American Opportunity Credit or Lifetime Learning Credit. See "Federal Credits that Save" in the Tax Preparation Menu.
- Taxpayer can only claim if they paid expenses and claimed the child.Youth can only claim the tax deduction if they paid and qualified to claim themselves.
- Now must complete form 8917 to claim deduction.
- Can't claim if married filing separately.
- Not allowed a tax deduction if
- Taxpayer is a dependent or could be claimed as a dependent. (Parent claims or qualifies to claim them).
- Parent can claim only if parent actually paid the expense.
- AGI phase-out and Tax Deductible Amount
|Single, HH, QW
|$0 - $65,000
||$0 - $130,000
|$65,000 - $80,000
||$130,001 - $160,000
The deduction is $4000 per return. ($2000 in phaseout range)
- There is no requirement to be a full time student.
- Must be for higher education expenses of current year or 1st 3 months of next year for taxpayer their spouse, or dependents for higher education costs. Eligible expenses are the same as American Opportunity Education credit.
- Can choose either to take a tax deduction or tax credit by student but not both on same student.
Domestic Production Activities Tax Deduction
- To encourage manufacturing and other production in the U.S., taxpayer can claim 9% in 2012 of the lesser of
- A. Qualified production activity (You must deduct overhead & cost of goods sold from income.)
- B. Modified AGI whichever is smaller.
- C. 50% of W-2 wages related to activity during the year.
- Use form 8903 to determine the amount that is tax deductible.
- Includes construction, renovation of real property, developing, creating, installing, cultivating, raising livestock, growing, manufacturing, engineering & architectural. A. Can’t take deduction on land portion.
- If taxpayer does other activities, must prorate income and expenses between items that qualify for domestic production and those that don’t.
- To compute, you start with gross receipts. Deduct cost of goods sold and other expenses. Deduction is limited to 50% of wages.
Other Deductions Tax Deductions
- Repayment of Subpay-TRA Tax Deduction (Trade Readjustment Allow.)
- A. Do not deduct under unemployment. (Causes IRS letter.)
- B. If amount is under $3000, deduct subpay repayment as a marginal entry on the "total adjustments line."
- C. If the amount is over $3000, can deduct from total adjustments or can recompute the earlier years tax & deduct credit on back of 1040 on line 70 writing "IRC 1341 credit" on line.
- Other Repayments (not including Social Security):
Repayments depend on type of income you included in prior year. You generally deduct on same form on which it was previous reported.
For wages, unemployment and other nonbusiness income
- A. Income and Repayment in same year. Reduce the taxable amount by the income repaid and report the difference.
- B. Repayment under $3000 of Prior Year Income. Report on the form it was originally reported on. If reported as wages, unemployment, report on Sch. A as 2% miscellaneous itemized tax deduction
- C. Repayment Over $3000 of prior year income. Report either as:
- Report as misc. itemized tax deduction not subject to 2%.
- Or take 1341 IRC credit on line 70. See line 70.
- Expenses of Rental of personal property tax deduction: Deduct expenses here up to the amount of income.
- Jury Duty paid to employer tax deduction: If required to give jury duty to employer, enter amount in marginal entry the tax deductible amount.
- Attorney Fees & Court cost for unlawful discrimination suits is tax deductible here up to amount of award included as taxable income.
- Death of Military or US Civilian Employees who die from terrorist or military action, their taxes are forgiven for year of death and all years beginning with the year before injury. It will be deemed you paid $10,000 in tax payments. Write “KITA” in big letters across the top of the 1040.
- Reforestation amortization and expenses tax deductible.
- Contributions to section 501C (18)(D) pension plans.
- Contributions by certain chaplains to section 403(b) plans.
- Legal costs of taxpayers who turned in a tax evader up to amount of income included as tax deductible.
Give us a call if you have questions or we can be of help, 765-452-8000. Killingbeck Insurance & Tax Preparation, Kokomo, Indiana.